1974 (3) TMI 22 - HC - Income Tax

A Firm Cash Credits Income Tax Act Taxing Statutes Undisclosed Sources Voluntary Disclosure Scheme

Issues Involved
1. Whether the Income-tax Officer (ITO) can reject the explanation of an assessee regarding sums credited in their books based on the nature and source of the said sum in the hands of the depositor, who declared it under the voluntary disclosure scheme of the Finance (No. 2) Act, 1965.
2. Whether the petitioners bypassed statutory remedies by filing a writ petition.
3. Whether the ITO has jurisdiction to question the veracity of declarations made under the voluntary disclosure scheme while assessing another assessee.
4. Whether the provisions of the Finance Act override the provisions of the Income-tax Act, 1961.

Detailed Analysis

Issue 1: Rejection of Explanation by the ITO
The petitioners, a partnership firm and its partners, filed returns for the assessment year ending March 31, 1967. The ITO added back Rs. 30,000 as income from undisclosed sources, related to credits in the firm's books in the names of three individuals who had declared these amounts under the voluntary disclosure scheme. The ITO opined that the depositors were not capable of earning the said amounts and that the voluntary disclosure scheme's immunity was limited to the declarants. The ITO held that the onus was on the assessee under section 68 of the Income-tax Act, 1961, and found the petitioners' explanation unsatisfactory, treating the credits as unexplained cash credits.

Issue 2: Bypassing Statutory Remedies
The respondents raised preliminary objections that the petitioners bypassed statutory remedies by filing a writ petition instead of appealing to the Appellate Assistant Commissioner and the Tribunal. However, the court found these objections untenable, stating that the questions involved were substantial questions of law, and the petitioners had pursued a remedy provided under the 1961 Act by filing a revision application to the Commissioner.

Issue 3: Jurisdiction of the ITO
The petitioners contended that the initial onus under section 68 of the 1961 Act was discharged by pointing out that the amounts credited belonged to persons who had disclosed them under the voluntary disclosure scheme. They argued that section 24 of the Finance Act provided conclusive proof of ownership and finality to the declaration, preventing the ITO from questioning the veracity of the disclosure. The ITO's actions were deemed beyond jurisdiction, and the petitioners were entitled to relief.

Issue 4: Overriding Provisions of the Finance Act
The court examined the relevant provisions of section 24 of the Finance Act, which constituted the voluntary disclosure scheme. It was found that the scheme aimed to bring unaccounted income to the surface without investigating the truth of the declaration. The legal fiction created by sub-section (3) of section 24 treated the declared amount as the total income of the declarant, and the income-tax paid was non-refundable. The court held that the ITO could not investigate the nature and source of the declared amount and could not include it in the total income of another assessee.

The court emphasized that section 24 of the Finance Act was an overriding provision, and section 68 of the 1961 Act had to yield to it. The legal fiction created by sub-section (3) of section 24 turned the declared amount into the total income of the declarant, preventing it from being taxed again in the hands of another assessee. The court rejected the contention that the Finance Act constituted a separate law of taxation and held that the income-tax charged under the Finance Act was the same as that under the 1961 Act.

Conclusion
The court quashed the orders of the Additional Commissioner of Income-tax and the ITO, setting aside the addition of Rs. 30,000 to the total income of the petitioner firm. The respondents were directed not to charge any income-tax in respect of the said sum from the petitioners. The petition was allowed, but no order as to costs was made.

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